SYDNEY (Reuters) - Resource-hungry China may be planning to
buy more than 9 percent of BHP Billiton Ltd, the world's
biggest miner, The Australian newspaper reported, muscling in
on BHP's proposed takeover of rival Rio Tinto Ltd.

The report drove up BHP's Sydney shares by 3.7 percent on
Wednesday, though the group's London-listed stock later fell
more than 2 percent after a senior management source at Chinese
steel giant Baosteel said he was unaware of any move by his
company to take a stake in BHP.

China was in the early stages of formulating a plan to buy
a chunk of BHP larger than the 9.3 percent of Rio it acquired
for $14 billion in February, the newspaper reported, after
quietly teeing up sellers of Rio's London stock.

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Baosteel, China's biggest steelmaker, had been touted by
London traders late on Tuesday as a possible BHP stake builder.

"If Baosteel has any plan (to do this) then I should be
informed, but I haven't been," the source close to Baosteel's
top management told Reuters.

Chinese companies and officials, seeking to safeguard iron
ore and coal supplies, oppose BHP's $135 billion bid for Rio,
fearing a merged group would have too much clout in negotiating
prices of raw materials vital to rapid industrial expansion in
the world's fourth-biggest economy.

"The mining companies are too strong in negotiations with
the steel companies," said Li Xinchuang, vice president at
China Metallurgical Industry Planning & Research Institute,
adding that multiple steel companies may be teaming up to buy
BHP shares.

"We can't rule out this possibility. It should be one of
the solutions," he said.

Rio's board has rejected BHP's offer as too low.

Mining industry executives and analysts said they were not
aware of any Chinese plan to buy BHP shares, and one Chinese
government source was doubtful Baosteel could muster the cash
for such a big purchase -- one that could cost more than the
Rio stake acquired by state-owned Chinalco.

Last year, Baosteel contradicted a Chinese newspaper story
that quoted its chairman Xu Lejiang saying it was considering a
$200 billion bid for Rio. The report unleashed a flurry of
speculation about a potential deal.

But for some, a Chinese share raid on BHP made sense.

"China realizes she can't buy companies outright, but can
take a nice minority interest and at least have a stake and a
voice in these key strategic resources," said Larry Grace, an
analyst at Kim Eng Securities in Hong Kong.

Domenic Martino, chairman of Australasian Resources Ltd,
which is developing an iron ore mine in Australia and which is
8.4 percent-owned by Shougang, China's fourth-largest
steelmaker, said there was an "unwarranted" fear of China Inc.

BREAKING DEPENDENCE

Chinese firms have been looking to buy mining companies in
Australia to break a dependence on BHP and Rio, who together
control around one-third of global seaborne iron ore trade.

"Effectively, (the Chinese) are the ones underwriting the
entire resource sector, "said Adnan Kucukalic, equity
strategist at Credit Suisse First Boston in Sydney.

"If I was confident about my demand for resources, why
wouldn't I hedge myself against that? I would be owning part of
BHP and Rio."

The price of iron ore has jumped fivefold since 2001, while
coal prices are more than twice last year's levels, powered
largely by strong demand from China.

The Australian report coincided with Prime Minister Kevin
Rudd's political stopover in Beijing, with investment in
Australia's resources sector a likely topics for talks.

Australian Resources Minister Martin Ferguson said support
for foreign investment was "non-discriminatory."

Offshore investors must gain Australia's Foreign Investment
Review Board approval to buy more than 15 percent of a local
company. Entities judged to be backed by Sovereign Wealth Funds
cannot buy any shares without FIRB approval.

($1=A$1.08)

(Additional reporting by Geraldine Chua, Denny Thomas and
Tom Miles in SYDNEY, Nao Nakanishi in HONG KONG and Alfred Cang
in SHANGHAI, Editing by Ian Geoghegan)